Typical Asset Allocation Picture

Many Financial Planners will talk about “Asset Allocation Strategies” as a way to safely grow your net worth.  Asset Allocation strategies sound pretty complicated to me, so I like to look at “Asset Location” first.

What is Asset Location?

Asset Location is having a plan for where you are going to locate your Assets – more simply, where are you going to store your money.  In terms of Start with the House, Asset Location is one of the final steps.  After you have:

1. Established an Emergency Fund
2. Paid of Credit Card Debt
3. gotten the right insurance protection

You need to start thinking about where you are going to put your money.  For too many people, they don’t think about this – they just try to pay off their mortgage as soon as they can.  I have no problem with paying off your mortgage – I do have a problem if you are paying off your mortgage and don’t know why, or if you are paying off your mortgage early and have more important things to do with your money.

Basic Asset Location

How to look at your Asset Location?

You can look at your Asset Location pretty easily.  I divide Asset Location into four basic areas:

1. Equity in your House
2. Cash
3. Retirement Savings
4. Non-Retirement Savings

So, to do this yourself, add up how much you have in House Equity, Retirement Savings, Cash and non-retirement investments.

To evaluate your Asset Location, you need to consider if the money in each category is

• Liquid
• Safe from loss
• Earning a Rate of Return

Every Asset Class (House Equity, Retirement and Non-Retirement Savings) does better or worse when looked at this way.  For example, Retirement savings should earn a rate of return, but they aren’t normally safe from loss, and they are liquid, but you usually have to pay an income tax  penalty.  Retirement savings end up scoring a 1.5 out of three points.

House Equity, however, fails all three tests – it is not liquid, is not safe from loss, and earns no rate of return!  (Your house may appreciate in value, but the equity in the house doesn’t cause that appreciation, so your equity just sits there…earning nothing).

What to do about your Asset Location

Create a simple chart like I show above for your situation – you can sketch this on a piece of scratch paper using estimates in just a few minutes, then look at what the chart is telling you.

• Do you have too much of one asset class? Then stop putting money there, or plan to shift some money elsewhere
• Is the pie too small?  Focus on building the sections of the pie one at a time – Cash, then non-retirement savings, then Retirement savings, finally House Equity.  Two thoughts here – (1) if you get a match on retirement contributions, go ahead and contribute to that plan to be sure to get the free money.  (2) If you own a house, you will build equity anyway as you send in the payment each month, so don’t send in extra unless you have nothing better to do with your money.
• Do you need to move some money around? Maybe you need to refinance, increase your retirement savings, or focus on building an emergency fund of liquid cash.

If you want to talk about your specific Asset Location, just give me a call at 704-541-1171.

Once your Asset Location is set up right, you will find it is easier to safely keep and grow your wealth so that you can then focus on Asset Allocation Strategies with a financial adviser.

Too many people think if they pay off their mortgage, they can never lose their house. Unfortunately, they often find out too late that is just isn’t true.

Watch this short video to learn the safest way to own your house:

Most people think Inflation means that things get more expensive.  They also think “Deflation’ means that prices are dropping.

Peter Schiff, a former US Senate candidate and President of Euro-Pacific Capital, famously called the housing bubble explosion before it happened.  He recently wrote a good article responding to NY Fed President William Dudley’s recent speech. 

By: Peter Schiff

NY Fed President William Dudley’s outrageous statements today closely conform to recent pronouncements from other Fed officials and confirm that a massive round of dollar devaluation is poised to begin.

Seemingly overnight, the Fed appears to have altered its mandate, ditching its former goal of “price stability” in favor of “moderate price inflation.” While no one is under the illusion that the Fed has kept prices stable over the last century, it used to be that the governors would at least pretend to fight inflation. Low inflation used to be the aim, now it’s the enemy.  

Although the inflation being created by the Fed may not be showing up immediately in rising rents or auto prices, it is nevertheless pushing up asset prices in other areas.  

Could it be that the Dow isn’t rising, but the dollar falling?

Dudley says it may take “several years” before inflation returns to levels consistent with the Fed’s mandate. Exactly when did the Fed establish a floor for “acceptable inflation?” Where is that floor, 2%? (The core PCE index is currently up 1.4% for the year) If we are below the floor, where’s the ceiling- 3%? 4%? In 1971, President Nixon imposed price controls when inflation averaged 4%. That rate was considered so high that emergency measures were needed. Is that still the case? How much higher do costs have to go for cash-strapped Americans before the Fed can be expected to take its foot off the gas?

Without better understanding of where these parameters lie for the Fed, the markets will be flying blind through an impenetrable fog.

If the Fed were serious about maintaining long-term price stability, which is its actual mandate, it would need to allow prices to fall after the speculative booms that it helped create. As we saw in the 1980s, unemployment resolves itself when the monetary system is sound, but no one will hire under the uncertainty of a rogue, inflationary Federal Reserve.

Mr. Dudley said, among other things, “Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve’s dual mandate“.

This tells me that the Fed thinks that we are going to see high unemployment and low inflation, or even deflation for a while. 

What should you expect as a homeowner in this environment?  

• If inflation is making the dollar buy less, then mortgage debt at low, fixed, rates isn’t too bad – you will pay back the loan with inflated dollars that aren’t worth as much as you borrowed.
• House prices aren’t likely to increase when other prices are falling – so, if you aren’t living where you want to live, it’s better to sell your house now at today’s prices – it may be harder to sell it in the future.
• If house prices will decline due to deflation, pay as little principle as possible – store your money in a place where it can grow, or at least maintain it’s value, rather than inside your house.
• Today’s low inflation is resulting in really low interest rates, so, if you aren’t in the home you want to be in, it’s still a great time to buy a home.
• Recognize the difference between your house (The physical structure as an asset), and your home (The safe place you raise your family, celebrate holidays, and create memories).  It can be the right time to sell a house, and a great time to buy a home at the same time.

It’s easy to get your Homeowner’s Insurance when you buy a house, and then forget about it.  The following is a guest article from Nico Iannelli with Medallion Insurance Services, on the importance of regular insurance reviews:

It’s Not Just Home Insurance

 The largest purchase most people make is a home.  Surprisingly, given the importance of this purchase and the impact that losing it could have on their lives, many people not only carry inadequate insurance but also rarely, if ever, review their insurance policies.  When you buy home insurance you’re not just protecting your home, you’re protecting your way of life.  An important question to consider when purchasing insurance is, “If I were sued would my existing personal insurance policies provide me with adequate protection?”

 Sure it’s easy to save money on insurance.  Some agents may say it’s simply a matter of omitting optional coverages, reducing liability limits, under-insuring property, increasing deductibles, or reducing the type of perils a person is insured against, just to name a few.   The problem is, when these options are exercised, one may lose the value that was sought when the coverage was initially purchased. 

 So how do you know the “quantity” of insurance purchased is appropriate to the cost?  To paraphrase a well-known saying, a good agent knows the client; a great agent knows the coverages.  No two home or homeowners are exactly the same.  Everyday someone suffers a loss and discovers his/her insurance protection is outdated.  But then it’s too late.  An important part of an agent’s job is to help clients prevent a loss and get the greatest value for their insurance dollars.  Your insurance agent should try to eliminate costly overlaps, bring your insurance up to date, and provide a full line of quality products to meet all of your personal and business insurance needs.  It won’t cost you a cent to have your insurance reviewed, but it could cost you money if you don’t.

 In event of a catastrophe, many homeowners find that their insurance is inadequate.  Either replacement costs have been woefully miscalculated, or in the case of an older home that must be rebuilt, there is either no or insufficient ordinance coverage, so that rebuilding to code must come from the insured’s pocket.  

 If your two-year-old flat screen TV were stolen, would you be fully insured to pay for the cost one?  You might not be, but you can be.  Homeowners policies are occasionally written on an “actual cash value” basis, meaning the amount the insurance company will pay equals the replacement cost of stolen or damaged personal property, minus a deduction for depreciation.  The result is that you will have to make up the difference in cost yourself.

 With Replacement Cost coverage you get:

• Full cost of replacing the insured items at the time of the loss.
• Complete cost of repairing or restoring the item at the time of the loss.
• Up to 400% of the actual cash value at the time of the loss.
• Any special limits of liability already described in the policy.

 Agents and insurers have not yet begun to educate the public of the importance of adequate insurance coverages, let alone the advantages of earthquake, flood, and ordinance or law coverages.  A prudent agent will periodically review property coverages with clients, taking a careful look at how needs have changed.  For example, the young couple who bought a “starter” home several years ago may have added an addition and swimming pool, purchased a boat, and “his and hers” Rolex watches.  This couple worked hard for the finer things in life and they need to protect their hard work.

If you haven’t reviewed your coverage in more than a year, call your agent, or, call a new agent to get a competing offer.  When you are refinancing your house, make it a point to review your coverage as well.

Most everyone thinks about whether they should own or rent their house in Charlotte.   You should also consider if you should own or rent your Life Insurance.

Here is the difference:

1. Employer supplied Life Insurance is Rented.  You lose that ‘lease’ when you leave that job.  If your health changes, you may find yourself unable to rent new insurance and you could be stuck without protection you need or desire for your family.

2. Term Insurance is also Rented.  With Term Life Insurance, you pay premiums for a specific period of time. While you are paying the premiums, you have insurance coverage.  Once the term expires, so does your insurance.  With term Life Insurance, once you stop making the ‘lease’ payments, you no longer have the insurance.  In the case of company supplied insurance, when you stop working for that company, they quit paying the ‘rent’ for you. 

3. You own Permanent Insurance.  This insurance can either be Whole Life, Variable Life, or Universal Life.  The key difference is that this insurance doesn’t quit on you when you leave a job or when a term expires.

Most people should have a combination of both types of insurance – Permanent and Term.  Just like your house – it’s pretty common to own your primary residence, and rent your vacation spot.  Since you only rent some insurance, it is usually cheaper to rent than to own.  Rented insurance makes it easy to get a lot of coverage for a lower cost.  This is particularly useful for younger families when they are starting out – there are lots of expenses, but the need for the insurance is usually at its greatest.  So, rent some insurance while the cost is low and the need is high, but also buy some permanent insurance for the long term.

As a rule a rule of thumb, I usually recommend permanent insurance to cover the mortgage balance.  This way, as a minimum, your family could always own the home outright if the insurance was needed.  Over time, most permanent insurance will start to build up ‘cash value’, just like a home you own will start to build up equity.  I’ve run several scenarios and what I found is that a properly designed permanent life insurance policy will always pay off the mortgage, and after the 30 years of the mortgage, the cash value can be greater than the amount of the original mortgage.  Compared to a rented Term Insurance policy that will expire about the time a mortgage gets paid off, a permanent insurance policy’s cash value can be a valuable source of retirement cash for a homeowner.

If you are able to benefit from refinancing your house right now, you can do your family a great service by using the monthly savings on your mortgage to make sure you have enough life insurance to protect what is important to you.  If you need to talk with an insurance professional, shoot me an email - I am happy to recommend someone for you.

Every September is Life Insurance Awareness Month.  With many kids going back to school this month in Charlotte, it’s a great time for Homeowners to pause, look at what is really important, and consider if they have enough Life Insurance to protect the most important people in their lives.

LIFE, a non-profit organization produced a Guide called “What you need to know about Life Insurance“.  It’s an informative, quick read that you can download here.  Save the PDF file, read it soon, and evaluate if you need to create or make changes to your insurance plan.

With so many homeowners benefiting today with the low mortgage interest rates, I recommend that Life Insurance be a strong consideration for the savings on the mortgage.  It’s always best to have a plan for the mortgage interest savings so that the money isn’t just wasted after closing.  Maybe protecting your family is the right thing to do?

The 15 year mortgage has become more popular since mortgage interest rates dropped.  An article in the Wall Street Journal gave some reasons why this is happening.

With the low mortgage interest rates, many homeowners are finding that a 15 year mortgage is more affordable than previously.  In addition, for those homeowners that have been in their house for 5-7 years, the leap to a 15 year mortgage isn’t as big of a stretch as it was then they bought their house a few years ago.

Should you consider a 15 year mortgage?

The Benefits of a 15 year fixed rate mortgage:

• Build equity in your home faster
• pay less interest
• forced savings account
• Benefit with low interest rate refinance without stretching loan term back to 30 years

The Cons:

• You have to make that higher payment each month
• A house is  a terrible place to store your wealth – better than spending, but worse than most any savings vehicle
• Opportunity cost – money used to pay down principal is money that can’t be used elsewhere
• Loss of flexibility – a future job loss or financial challenge could be catastrophic because of the higher required payment on the 15 year fixed mortgage

In some areas, a 15 year mortgage is a disaster for people – for example, someone who took out a 15 year fixed mortgage in Florida or Las Vegas in 2007 is now seeing that they send in a payment and the house price drops by more than the principal paid in.  How would it feel to send $1000 to your savings account and the next day have $0 left?  That is what many people experienced with 15 year mortgages in rapidly declining markets.

Which loan is best for you?

On the other hand, if you are in a stable housing market like Charlotte or Raleigh, North Carolina, the 15 year mortgage may not be so dangerous.  You will spend less on interest, build equity faster, and protect yourself from spending the money elsewhere – the forced discipline of this mortgage is helpful to some people.

If you have pretty good assurance that your income is going to be stable or increasing for the next several years, if you are already saving for retirement, have an emergency fund, and don’t carry other debts such as credit cards, student loans, or car loans, then you may be ready for the larger payment of the 15 year fixed mortgage.

If you have some credit card balances, don’t have several months living expenses already saved in an emergency fund, and aren’t putting away money for retirement or kid’s education, don’t get a 15 year mortgage – there are more important things to do with your money.

Before you decide to take on a 15 year mortgage, consider the best uses of your money, and make sure your new mortgage won’t prevent you from doing something more important.

For many homeowners, their monthly mortgage statement for their mortgage includes a sales pitch to call in to refinance.  Too many people do this to their own harm.  Right now, if you are paying over 6%, does your current lender really want you to refinance?  Short answer: No, but if you are going to they would rather have you refinance with them than with someone else.

Why would a mortgage servicer to whom you paying 6% interest want to help you refinance to 4.5% or anywhere else?

Since they don’t really want you to refinance, do you think they will really work on your behalf?  Too many times over the last 18 months, I’ve talked with homeowners that were charged $300-$500 to apply for a refinance, only to be delayed and ignored for 60 or even 90 days.  Then, suddenly interest rates have increased, credit scores aren’t high enough, or the appraised value is too low to refinance.  Often, we can help these home owners refinance in a little as 30-45 days with no issues.

An independent mortgage lender has no conflict of interest – if you can benefit from refinancing, they’ll tell you.  With your current mortgage lender, if you can benefit from refinancing, but it hurts them, do you really think they want to help?

“But, they already have all my information”. Guess what, over 95% of all mortgages will be sold to Fannie Mae or Freddie Mac.  Fannie and Freddie need current paperwork – so whether your previous lender has paperwork from last time or not, you will still have to gather up fresh pay stubs, bank statements, W2s and whatnot – regardless of who did your loan last time.

“My current lender doesn’t need an appraisal”.  Neither does any other reputable lender if your mortgage qualifies for a Making Homes Affordable Refinance Program.  This stimulus program allows some home owners who’s mortgage is owned by Fannie Mae to refinance to today’s lower rates without an appraisal.

“They told me it was easy”.  Sure it is, if you make it easy for them.  Realize, when you call, you won’t be talking to a local mortgage professional in Charlotte – you will get a call center employee earning low wages that really doesn’t care if you refinance or not, they are just watching the time clock until they can go home.  Do you really want to trust something as important as this to a call center that will connect you to someone else everytime you call in?  And, if it gets too difficult, you might stick with your current higher interest rate – even better for your lender than a new loan is.  Sounds easy for them, not for you.

Which loan is right for you?  The call center employee you talk with has no idea what loan you should get.  Shouldn’t you work with someone who can show you the various options and the financial impact to you over time of the different loans you have available to you?  A local, independent, mortgage professional should be able to show you the total cost over time of a new loan compared to your current loan.  If your loan representative doesn’t – quite frankly, you need to find someone who can.  Consider talking with a Certified Mortgage Planning Specialist to get the best advice on your next loan.

So, who should you call?

1.  Try the person that helped you with your last loan, if they are still in the business, were trustworthy and reliable last time, and gave you good advice

2.  Find a CMPS in your local area at the CMPS website.

3.  Ask a trusted advisor, like your Financial Planner, Real Estate Agent, or CPA who they would  recommend.

4.  Email me - and I, or someone on my team,  will help you in North and South Carolina, or, we will refer you to a professional elsewhere in the US.

You can always call your current mortgage servicer, but just remember, they really don’t want you to refinance – as they are watching their bottom line, not yours.

If you were asked to make an investment in which you were told you would never see your money again, how much would you invest?

If you put money in a savings account each month, and the bank guaranteed you that you could never withdraw the money again, would you keep depositing checks?

If your savings account was only available to keep your bank from losing money, but you could still lose money, would you keep money in that savings account to protect your banker?

If you put money in an account that was guaranteed to never pay you more than 0% interest, would you want to save your money in that account?

What if the money in the 0% account could lose money, even if it couldn’t gain money?  How much would you put there?

What are these horrible accounts I am talking about?

Did you guess Home equity?

Think about it -

• When you make a big down payment on a house, you don’t get paid money each month by the bank for that, do you?
• When you send in extra principal payments, does the banker pay you interest?
• If your home loses value, does the bank lower your mortgage balance, or does your ‘Home equity Savings Account’ disappear?
• If you have a lot of equity, does that make your house go up in value?

Down Payments, Home equity and mortgage repayment or early payments are all questions regarding where you should store your wealth over the long term.  Equity in your house doesn’t make you safer or wealthier – it just sits there.

Big down payments are safe for the banker – not you!

Of course, you pay interest on money you borrow, but that is a choice – you can pay interest, and store your money elsewhere, or not pay interest, and maybe keep the bank from losing money.

Make sure your mortgage provider asks a lot of questions about down payment amounts and home equity before you structure your mortgage.

If you already are in a mortgage, get an annual checkup to make sure your mortgage is helping you to succeed financially, rather than helping the bank succeed.

If your mortgage is owned by Fannie Mae or Freddie Mac.  For most people, they have no idea who owns their mortgage – all they know is the servicer.  The Servicer of your mortgage is the bank that you send your check to each month.  They collect the escrow payments, chase down late payments, and send the owner of the mortgage their check each month.  Fannie Mae and Freddie Mac own most conventional mortgages in the US.  (Over $6 Trillion worth).

The Federal Housing Finance Agency has extended the government’s Home Affordable Refinance Program by 12 months.

HARP’s new end date is June 30, 2011.

Originally known as Making Home Affordable, HARP aims to help North Carolina homeowners refinance their mortgage who may otherwise be ineligible because of falling home values.

There are 4 basic HARP criteria every borrower must meet:

1. The existing home loan must be guaranteed by Fannie Mae or Freddie Mac.
2. Your home must be a 1- to 4-unit property
3. You must have a perfect mortgage payment history going back 12 months. No 30-day lates allowed.
4. Your first mortgage balance must be 125% or less of your home’s market value

If you’re not sure whether Fannie Mae or Freddie Mac back your mortgage, you can look it up. Fannie’s website is http://www.fanniemae.com/loanlookup; Freddie’s is http://freddiemac.com/mymortgage.  If you don’t locate your loan on either website, your mortgage is backed by a third-party and is not HARP-eligible.

For homeowners that meet HARP’s criteria, there are some underwriting details of which to be aware.

First, if your original mortgage does not require mortgage insurance, your HARP mortgage will not require it, either — regardless of your new loan-to-value.

Second, all HARP refinances require income verification. It doesn’t matter if your original mortgage was a stated income or no income verification loan. You should expect to produce 1040s and W-2s for your HARP refinance and asset statements, too.

And, lastly, second (and third) mortgages may not be “rolled in” to a new first mortgage loan balance. Junior lien holders must agree to remain in a junior lien position, regardless of combined loan-to-value.

There is a thorough HARP FAQ section on the government’s website, but it’s for general questions only. For specific Home Affordable Refinance Program information, first make sure you’re program-eligible, then pick up the phone to call your loan officer.

While this program hasn’t been too successful nationally, we have helped many, many homeowners in the Charlotte area over the past year with this program.  If the resources listed in the post aren’t enough to get you started, feel free to give us a call for more answers.